GDS Holdings Limited — FY2018 Form 20-F Summary
Business context and reporting period
GDS Holdings is a Cayman Islands holding company and China-focused developer and operator of carrier- and cloud-neutral data centers. The filing is an audited annual report for the fiscal year ended December 31, 2018, prepared under U.S. GAAP. The source does not provide standalone fourth-quarter 2018 financial results; the figures below are full-year 2018 amounts.
At year-end, GDS had approximately 590 customers, 160,356 square meters of data-center area in service, 65,201 square meters under construction and 78,967 square meters held for future development. In-service capacity was 94.9% committed and 67.6% utilized; capacity under construction was 48.4% pre-committed.
Financial and operating metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenue | RMB2,792.1 million (US$406.1 million) | RMB1,616.2 million | +72.8% |
| Service revenue | RMB2,759.5 million | RMB1,591.9 million | +73.3% |
| Colocation revenue | RMB2,104.3 million | RMB1,219.1 million | +72.6% |
| Managed services and other revenue | RMB655.2 million | RMB372.8 million | +75.8% |
| Gross profit | RMB622.4 million | RMB408.5 million | +52.4% |
| Gross margin | 22.3% | 25.3% | Down 3.0 percentage points |
| Income from operations | RMB168.4 million | RMB82.2 million | +104.7% |
| Operating margin | 6.0% | 5.1% | Up 0.9 percentage points |
| Net loss | RMB430.3 million (US$62.6 million) | RMB326.9 million | Loss increased 31.6% |
| Adjusted EBITDA | RMB1,046.5 million (US$152.2 million) | RMB512.3 million | +104.3% |
| Adjusted EBITDA margin | 37.5% | 31.7% | Up 5.8 percentage points |
| Net cash used in operating activities | RMB12.9 million | RMB167.8 million | Improved, but remained negative |
| Capital expenditures | RMB4,258.0 million | RMB1,760.2 million | +141.9% |
| Cash and cash equivalents | RMB2,161.6 million | RMB1,873.4 million | +15.4% |
| Total consolidated indebtedness | RMB12,793.0 million (US$1,860.7 million) | Not clearly stated on the same basis | Not comparable from source |
Cost of revenue rose 79.7% to RMB2,169.6 million, led by utility costs of RMB656.1 million and depreciation and amortization of RMB680.3 million. Interest expense increased 59.3% to RMB656.2 million. The company reported a net loss per ordinary share of RMB0.43, compared with RMB0.42 in 2017.
At December 31, 2018, total assets were RMB20,885.2 million, total liabilities were RMB15,363.3 million and shareholders’ equity was RMB5,521.9 million. Accounts receivable were RMB536.8 million, while current liabilities were RMB3,507.9 million. Working-capital and project-financing facilities totaled RMB8,134.0 million, of which RMB1,497.5 million was unused.
Material changes versus the prior comparable period
- Revenue growth was driven by a 75.4% increase in colocation revenue and a 75.8% increase in managed services and other revenue, principally as utilized area increased from 61,713 to 108,326 square meters.
- Total committed area increased from 102,528 to 183,743 square meters, while in-service area increased from 101,258 to 160,356 square meters.
- Gross margin declined because utility, depreciation, rental, personnel, network, maintenance and other data-center costs grew faster than revenue.
- Operating margin improved as operating expenses declined from 20.2% to 16.3% of revenue, despite higher share-based compensation and public-company costs.
- Net loss widened because the benefit from operating income was more than offset by higher interest expense and non-cash depreciation and amortization.
- Investing cash outflows increased materially, primarily for data-center construction and acquisitions. Financing activities provided RMB4,876.8 million, including proceeds from borrowings, convertible notes and ordinary-share issuance.
- GDS acquired the GZ3 and SH11 data-center projects in 2018 for aggregate stated consideration of approximately RMB582.2 million, subject to adjustments and contingent payments.
- In June 2018, GDS issued US$300 million of 2% convertible senior notes due 2025 and received net proceeds of US$291.1 million. The notes were recorded at RMB2,004.7 million at year-end.
- GDS adopted ASC 606 in 2018 using the cumulative-effect method. The reported adoption adjustment increased opening accumulated deficit by RMB0.7 million; the reported 2018 net loss was RMB0.7 million higher than it would have been without adoption.
Guidance, outlook, management commentary and risks
Management expects continued expansion of data-center capacity, colocation, managed hosting and managed cloud services. It believes cash on hand, operating cash flows and existing financing resources will fund current obligations, working-capital needs, debt service and capital spending for at least the next 12 months. However, management also expects to require additional capital for expansion and potential acquisitions.
The filing does not provide numerical 2019 revenue, EBITDA or earnings guidance. Planned expansion includes approximately RMB3,532.8 million of additional investment to complete data centers under construction, plus approximately RMB243.7 million of additional fitting-out investment for in-service facilities.
- Leverage and liquidity: substantial debt, variable-rate borrowings, capital-lease obligations and convertible notes require significant cash payments. Loan agreements include financial covenants, cross-default provisions and change-of-control, ownership and IDC-license conditions. The company stated that it was in compliance with its covenants at December 31, 2018.
- Negative free cash flow: operating cash flow remained slightly negative while capital expenditures increased sharply, creating continued dependence on debt and equity financing.
- Customer concentration: two customers generated 27.0% and 17.4% of 2018 revenue. Four end-user customers represented 27.9%, 24.2%, 11.4% and 10.3% of total committed area.
- Regulatory and VIE exposure: approximately 97.2% of 2018 revenue was attributed to consolidated VIEs. Changes in PRC regulation or enforcement could impair the contractual arrangements, licenses or ability to consolidate the VIEs.
- IDC-license compliance: certain subsidiaries and data centers faced uncertainty regarding geographic scope, authorization renewals and the need to obtain separate IDC licenses. Potential penalties could be several times the related service revenue, according to the filing.
- Operating risks: power availability and costs, construction delays, data-center outages, cybersecurity incidents, lease-title and permitting issues, telecommunications-carrier dependence and natural disasters could adversely affect results.
- Accounting and asset risks: goodwill was RMB1,752.0 million and no impairment was recorded in 2018. Valuation depends on occupancy, contract rates, future cash flows and other judgments.
- Litigation: a securities class-action lawsuit filed in 2018 alleges misstatements concerning commitment and utilization rates and acquisition purchase prices. The case was preliminary as of the filing date; no liability was recorded because the potential loss could not be reasonably estimated.
- Governance and ownership: Class B shares carry 20 votes per share for specified director-election matters. The founder controlled all Class B shares, while STT GDC held approximately 38.0% of Class A shares and retained significant appointment and financing-related rights.
Most important facts for an investor to verify
- Reconcile 2018 revenue growth with utilized area growth, customer move-in timing and the gap between the 94.9% commitment rate and 67.6% utilization rate.
- Assess whether operating cash flow can become sustainably positive while planned capital expenditures and debt service remain high.
- Review debt maturities, interest-rate exposure, secured collateral, covenant headroom and the RMB1,497.5 million of unused financing facilities.
- Validate the status and renewal path of all IDC licenses and authorizations, especially for Tianjin, Zhangjiakou and subsidiaries operating under GDS Beijing’s license.
- Evaluate VIE concentration, enforceability of the contractual arrangements and the ability to transfer cash from PRC entities to the offshore parent.
- Monitor customer concentration, contract renewals, churn and the risk that large customers delay deployment, reduce commitments or terminate contracts.
- Review the 2018 acquisitions, contingent consideration, goodwill balance and assumptions supporting the absence of impairment.
- Track the securities class action and any future disclosure regarding potential damages, settlements or insurance coverage.
- Consider the expected balance-sheet effects of ASC 842 lease adoption in 2019, including approximately RMB483.6 million of additional operating lease liabilities and RMB514.0 million of right-of-use assets estimated at adoption.